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Free Minds & Free Markets

Our Wealthier World

World Bank economist Kirk Hamilton explains how China is growing while the U.S. flirts with asset depreciation.

Every American has access to $734,000 in wealth, according to a new report by the World Bank, The Changing Wealth of Nations: Measuring Sustainable Development in the New Millennium. But most of it—85 percent—is “intangible.” The U.S. ranks first in the world in intangible wealth per capita, at $628,000. In comparison, the average Chinese has access to just $19,234, of which $8,921 is intangible. 

These are the estimates that Kirk Hamilton, lead economist in the Development Research Group of the World Bank, and his team calculated for the update to their groundbreaking 2006 report Where Is the Wealth Of Nations?: Measuring Capital for the 21st Century. The new study finds that between 1995 and 2005 global wealth increased by 34 percent and that 80 percent of the additional wealth created consists of intangible capital. 

We all intuitively know what tangible wealth is. It’s oil wells, automobile factories, houses, roads, sewage treatment plants, farms, forests, and so forth. But what is intangible wealth? As The Changing Wealth of Nations explains, such wealth consists of “human capital, social, and institutional capital which includes factors such as the rule of law and governance that contribute to an efficient economy.” The World Bank report quantifies how living in free countries with honest governments surrounded by educated people dramatically boosts your ability to earn income and create wealth. The poorest countries, meanwhile, have the worst governments and least educated people, with economies that depend on exploiting natural resources. Think of oil-rich Nigeria, where corruption runs rampant, social trust is fragile, and adult literacy is just 60 percent. On the World Bank’s rule of law index Nigeria scores 63rd on order and security out of the 66 countries ranked, whereas the United States ranks 13th. 

The policy conclusion is that if countries want to get rich they must aim at improving their human capital (educating their citizens), strengthening the rule of law, and making government accountable. Otherwise, they will remain mired in poverty.

reason interviewed Hamilton back in 2006, so we invited him to drop by our Washington, D.C., office to catch up on his latest findings. A version of this interview can be seen at reason.tv.

reason: Why did you write this book?

Kirk Hamilton: It’s part of a 15-year work program at the World Bank to say: How do we get beyond GDP? We know finance ministers everywhere say the growth of GDP is how we measure our success, but we have a strong sense that it is only picking up part of the story when we talk about development. It doesn’t pick up the fact that you’re depleting your natural resources. It doesn’t pick up the fact that policies and institutions are changing over time. You see the outcome of that if the changes are positive. You also see the outcome if the changes are negative. But you don’t really have a more direct measure of how the wealth of the country is changing. So this is a long-term project to try to build up evidence on this question of where is the wealth of nations. Coming out of that then we can start to change how development policies are implemented.

reason: OK, so where is the wealth of nations?

Hamilton: We now have three years of estimates of the wealth of nations: 1995, 2000, and 2005. Some things changed between the two books and some things are the same. What’s certainly the same is that the intangible wealth of nations is still the largest share of wealth in virtually all countries. In low-income countries it’s about half of wealth, about 50 percent. But for high-income countries like the United States it’s as high as 80 percent or more. 

When we look at developing countries, however, we see something interesting, which is that the natural resource base for them is a much more important share of wealth. It’s something like over 30 percent of the wealth of low-income countries compared with produced capital—buildings, machines, infrastructure, things like that—which is about half that. So for low-income countries in particular, how they manage their natural wealth is a big part of the development story. But half of the wealth is still intangible—it’s still this mixture of human capital, institutional quality, social capital, all those things that aren’t measured directly in the national accounts.

reason: Let’s go through some of those components: What is natural capital?

Hamilton: In the data that we have it consists largely of land. Agricultural land is a big part of the story, especially in low-income developing countries. But forest land as well; we look at some of the services that forests provide as well as the timber values. We put a very rough value on protected areas. If you think of the national parks in the U.S., we have a very crude estimate on the wealth that represents. And then we have data on about a dozen types of minerals, and then oil, gas, and coal. In many countries those are the big natural assets. 

reason: What about produced capital?

Hamilton: It’s all the assets that we produce. So infrastructure, like roads, highways, ports, buildings, whether it’s office buildings or private dwellings. Those are the big things that produce assets. Things that aren’t used up in a year, that produce a service over time. 

reason: That’s what most people think of as wealth: natural wealth plus the produced wealth. But there’s something else that looms much larger—intangible capital. What is that? 

Hamilton: That’s the skills and the knowledge that people have in their heads. It’s what you can do with your head as opposed to what you can do with two hands and two feet. 

reason: In your concrete figures for intangible wealth in some countries, the institutions are reducing the human capital value by more than the value of the capital, right? In some of these places it’s negative $200,000.

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  • Suki||

    Why all of this amazement at Communist China growing while Taiwan has been blowing their doors off since that little civil war?

  • ||

    Especially as Taiwan has essentially no natural resources. Hell, don't they have to import water?

    I love how otherwise educated people talk about natural resource like they're the source of wealth. How many millions of years did petroleum sit in the ground? How many thousands of years was it a nuisance in farmers' fields before it became wealth?

  • Suki||

  • ||

    Because Taiwan's economic basis is capitalistic. That doesn't appropriately mesh with the leftist narrative.

  • ||

    Because Capitalist/Communist China -- where the American Capitalist elites stick their factories to take advantage of Communist slave labor -- wants to absorb Taiwan. That doesn't appropriately mesh with the right-wingnut narrative.

  • ||

    Not to mention that unlike Taiwan much of Chinas recent growth has been completely unsustainable. The technocrats in China have been bailing out local goverments and goverment sponsored businesses because they took on too many projects that ultimately will have a net negative ROI. But the eggheads never notice this, they are too in love with the idea that if given the opportunity they could solve the worlds economic problems by decree.

  • Paul||

    Do I have to read the article? Obama and his economically dimwitted minions tell me it's because of their aggressive investment in trains that are high speed and run on time.

  • ||

    Yes. So that I don't have to.

  • ||

    In fact, they also serve as supplemental population control!

  • ||

    I imagine they'd be more effective at population control if they weren't so damned empty.

  • ||

    The only threat to the United States right now is itself.

  • T||

    Yeah, that does seem to be the short version.

  • Paul||

    Yes, our lack of investment in green jobs and high speed rail is killing us!

  • ||

    is the United States.

  • ||

    Just wait until the Chinese bubble bursts.

    http://www.salon.com/2011/10/3.....singleton/

  • ||

    IceTrey: See also my earlier article The China Derangement Syndrome.

  • ||

    Ok. That article is about GDP growth, not a debt crisis. As you yourself stated, "Instead, the Japanese financial bubble burst."

  • Suki||

    Japan's adventures with National Socialism in the 1970's were what caused their economic bubble burst? Your article sounds sort of that way.

  • ||

    The real problem is that the Japanese bubble never really burst, they wanted to keep things as they were, the worst thing that one can do.

  • ||

    Just wait until the Chinese bubble bursts.

    Do we have to?

  • ||

    Trying to quantify intangible wealth is a contradiction.

  • ||

    "Intangible wealth" is a term created to make us feel better about our selves as our society outlaws all usable natural wealth, oil, trees,etc. and If you find a away to make money without that then they regulate your business to death. So a new term to make us think were richer than we actually are.

  • ||

    I thought the Objectivist cult which helped to create modern libertarianism emphasizes intangible capital ("the power of man's mind") as the ultimate source of wealth.

  • ||

    China is growing because, when your GDP per person really, really sucks because of Communist idiocy over decades, and then some of the idiocy is ended, your GDP per person can grow quickly but still be very low because of the lingering idiotic policies.

  • ||

    Michael Moore disagrees!!!!!11111111111

  • ||

    I can imagine an authoritarian government coming to power in the U.S. and I sometimes think it might not be a bad thing. Then I think of the clowns that would probably be running things. We are doomed!

  • ||

    Wangtang (whatever the Internet progogandists the Chinese Reds pay are called), or what?

  • ||

    America probably needs a Pinochet, not a Ron Paul.

    Whom do you want to send to the Soccer Stadium?

  • ||

    Regarding the whole "why is China growing" debate. I remember reading some survey of countries asking the people which system the prefer, capitalism/communism/democracy etc. I don't know which site the survey is on, but I do remember that the Chinese picked capitalism over communism by far, France was actually the country with the highest proportion of communist sympathy.

    There is a stereotype of Chinese people being a big collective horde, they actually have a big number of enterprising individuals and it is no surprise that they would have an economy that is booming.

  • ||

    Very true. Just walk into any Chinese neighborhood in say New York City and you'll quickly see they're up their as the most entrepreneurial people.

  • ||

    I've met a few Chinese immigrants that identify strongly with the Republic of China (Taiwan) even though they've never even been there before, pretty much all of them rabidly anti-communist.

  • ||

    It is cultural. Thomas Sowell has an interesting book called Race and Culture. In it, he talks about how certain cultures produce certain qualities that are related to different economic activities.

    The largest beer producers in the US, and Brazil are Germans. Italians the world around make some of the best tailors. Chinese are industrious entrepreneurs and the Lebanese are merchants. While obviously not universal, culture effects how people behave.

  • ||

    One of the reason why the Chinese have such a huge diaspora. The most enterprising of the bunch left for greener pastures around the world.

  • Paul||

    Think of oil-rich Nigeria, where corruption runs rampant, social trust is fragile, and adult literacy is just 60 percent.

    Sounds like my house.

  • ||

    Sorry to hear that!

    The Niger Delta is the worst I know of, but by no means unique. Places where they depend on natural resource export as their main industry seem to follow that same nasty pattern.

  • ||

    We call that a colony.

  • ||

    Rentier paradox.

  • Paul||

    Oh, and I really liked Kirk Hamilton in L.A. Confidential.

  • jason||

    i like your site a lot!

  • ||

    Do you guys think it's coincidence that no lefty I've ever talked to, ever, knew anything about Taiwan at all? I guess the fact that it's capitalistic, highly developed, and prosperous doesn't really gel well with all their pro-Red China chanting.

  • ||

    Do you guys think it's coincidence that no right wingnut I've ever talked to, ever, knew anything about Sweden at all? I guess the fact that it's socialistic, highly developed, and prosperous doesn't really gel well with all their government for me but not for thee chanting.

  • ||

    Yeah, but can you gambol about freely in Sweden until your digits fall off due to frostbite?

  • ||

    Actually, Red State America, Sweedes will tell you that there country has a capitalist economy that supports an expansive welfare state. Except for the minority that belong to the socialist party they reject socialism altogether.

    Except for healthcare, Swedish economic activity is in private hands at least as much as the US economy is.

  • ||

    Mises Institute, white courtesy phone please, I've got good news from Isaac Bartram.

    We both felt that Sweden desperately needed it, because libertarianism and sound economics are almost completely missing from the public debate.
    http://www.mises.se/om/mises-sweden/

  • ||

    The policy conclusion is that if countries want to get rich they must aim at improving their human capital (educating their citizens), strengthening the rule of law, and making government accountable. Otherwise, they will remain mired in poverty.

    I agree - though governments should refrain from administering education.

    However, governments do not seek to make their citizens rich. Politicians and bureaucrats generally seek to make themselves rich and to expand their influence. Therefore, government officials look to hand out favors to specific recipients if doing so expands their influence.

    Additionally, the whole notion that government should provide leadership to the civilian population tastes especially horrible. Government officials lead other government officials - but they don't lead civilians (or they aren't supposed to). Therefore, it is not up to government to seek to make its citizens rich (as if it were playing a really big and expensive game of SimCity). The responsibility of government is provide national defense, a system of laws, and the means to impartially administer the law. What we citizens decide to do with such an environment is up to us as individuals - not as some mission-focused collective.

    “America wasn't founded so that we could all be better. America was founded so we could all be anything we damned well pleased.”
    ― P.J. O'Rourke

  • ||

    Yeah well, worshiping Mother Earth damned well better please you, sonny boy. Because your betters have taken over the government, and nothing less will please them.

    Oh, and don't forget the Chinese are taking over the world. Pronto. At least until Americans stop buying TVs, at which point China will (shhhhh, vewy vewy qwuietly on tip toes) implode.

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